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Short-sellers gather in Hong Kong to unveil latest targets
June 7, 2017 / 1:20 PM / 3 months ago

Short-sellers gather in Hong Kong to unveil latest targets

* Hong Kong campaigns on track for six-year high

* Muddy Waters, GeoInvesting reveal short ideas at Sohn Conference

* Muddy Waters founder Block in rare public Hong Kong appearance

* Short sellers say market manipulation make HK stocks targets

* Companies increasingly pushing back with rebuttals, PR campaigns

By Michelle Price and Elzio Barreto

HONG KONG, June 7 (Reuters) - Activist investors who have made their names and fortunes exposing fraud at overseas-listed Chinese companies signalled a ratcheting up of short-sell campaigns in Hong Kong on Wednesday, as they revealed their latest bets against China-based firms.

Short-sell campaigns have gained pace in Hong Kong in recent years, with an uptick that investors say underscores persistent problems with governance, disclosure and specifically market manipulation, which they say is not being tackled by regulators.

Carson Block, founder of research firm Muddy Waters, and GeoInvesting co-founder Dan David outlined their new positions to a packed audience of hedge fund managers and bankers in the city, sending the shares of targeted firms tumbling.

The short-sell positions unveiled brings the number of such campaigns against Hong Kong companies to at least seven this year, putting 2017 on track for a potential six-year high, according to Activist Insight data.

Block shot to fame using his own money to bet that shares in Chinese companies he believed were overvalued would fall. A report from Muddy Waters accusing Toronto-listed Sino-Forest Corp. of fraud in 2011 prompted a regulatory investigation, and the company filed for bankruptcy in 2012. More recently he has targeted China’s Huishan Dairy.

Block, whose presence this year made for standing-room only at the Sohn Hong Kong Investment Conference, said he had a short position in sofa-maker Man Wah Holdings, which he accused of financial irregularities including inflated profit margins. The company’s stock fell more than 15 percent before being halted.

David, who last month targeted property and healthcare company Fullshare Holdings, presented his short position on Dali Foods Group, which he accused of suspect finances including inconsistencies in its tax filings. Shares in the company fell more than 7 percent.

Representatives for Man Wah Holdings and Dali Food Groups could not immediately be reached for comment.

FACE TIME

Block moved from Hong Kong to California in 2012 after receiving death threats, and since then public appearances by top short sellers in the city have been rare.

Along with peers such as Jon Carnes of Alfred Little, Block helped wipe more than $21 billion off the value of U.S.-listed Chinese companies during the first wave of such campaigns between 2009 to 2011, with several targets ultimately delisted.

Since then, Block and other new arrivals to the scene including Anonymous Analytics, Gotham City and most recently Blazing Research, have set their sights on Chinese firms listed in Hong Kong, where they say loose rules and poor enforcement continues to allow dodgy companies to thrive.

In particular, Hong Kong’s low free float requirement of just 25 percent makes it easy for listed companies to manipulate their own stock price, attracting short-sellers who screen for irregular trading activity as a major red flag, they said.

“We don’t think there are more pure frauds out there than before. However, there are noticeably more manipulated stocks out there, and that’s just going to attract attention,” Anonymous Analytics, which made its name targeting Tianhe Chemicals Group in 2014, said in an email. “Hong Kong needs to do something about this problem.”

The Hong Kong Securities and Futures Commission (SFC) has said stamping out malfeasance by public companies is a top priority, while former SFC chief Martin Wheatley told the Sohn Conference, a charitable event that raises money to fight childhood cancer, that short-sellers were helping to keep companies in check.

The Hong Kong stock exchange, meanwhile, now requires companies to quickly address allegations - making for more protracted campaigns as the companies and short-sellers swap public rebuttals.

Chinese companies, notoriously opaque and historically inclined to intimidate short-sellers, are fighting back through public relations campaigns, hiring corporate communications consultants and openly engaging with the press.

The management of Credit China Fintech Holdings and AAC Technologies Holdings, both held open press briefings to discuss allegations made against them last month by Anonymous Analytics and Gotham City respectively - a rare event.

These public rebuttals do seem to help the share price, say short sellers and corporate communications executives. But it is unclear how long for.

“Although these active responses may show confidence of management, institutional and professional investors will only evaluate a company based on arguments and evidence,” Blazing Research, an anonymous new research firm that recently targeted Cogobuy Group, said in an email.

“These public rebuttals may only be effective to persuade retails investors.” (Reporting by Michelle Price and Elzio Barreto; Editing by Alex Richardson)

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